How to Calculate Payroll

Payroll is the entire amount of all financial records of wages, deductions, bonuses and salaries for an employee in an organization. It is necessary to know how to calculate payroll for every employee. Payroll means that amount which is paid to employees for the work they have provided for the organization for a certain period of time.

In this article you will get to know how to calculate payroll in some simple steps.
How to Calculate Payroll
Steps for calculation

  • At the first step, you should calculate your gross earnings. You can do this by multiplying your pay by 12 that is by finding out your annual income. For instance, if you earn $ 4,000.00 per month then you should multiply this amount by 12 to compute annual pay. Now you will find an amount which will be $ 48,000.00.
  • Now you should take this amount that is $ 48,000.00 and divide this amount by 52. It is so because there are 52 weeks in the entire year. It is not necessary that a month will contain only 4 weeks. After this you will find the amount which will be $ 923.08 per week. It is to be remembered that this is the gross pay and not the take home pay.
  • After calculating weekly rate, you should calculate hourly pay. Now you should take $ 923.08 and divide this amount by the number of hours you have worked. Let us suppose the number of working hours is 40 hours. Now divide $ 923.08 by 40. You will get an amount of $ 23.07 per hour after this calculation. Now you have obtained your regular rate which is $ 23.07 per hour.
  • Sometimes we get paid for overtime. In that case, we should learn to compute overtime pay. You should take your hourly rate of $ 23.07 and multiply this amount by 1.50 (OT rate per hour). Now you will find your OT pay which is $ 34.61 per hour for overtime (worked hours over 40 hours).
  • Sometimes we get double pay. Some employers give double pay for working on Sundays. This will be calculated in the same way, we have calculated OT. You have to take your hourly rate and multiply that rate by 2. This multiplication will bring your DT pay which will be $ 46.14 per hour.
  • Let us assume you have worked for 45 hours in your first week of employment. Now the calculation will be

$ 23.07 * 40 = $ 922.80

Overtime pay = $ 34.61 * 5 = $ 173.05

Now, you have to add both the regular pay and the overtime pay

$ 922.80 + $ 173.05 = $ 1,095.85

This amount is your gross income for the first week of your employment.

  • Now you should start to calculate the deductions. Let us first deduct the Federal Income Tax. You should get your Federal Income Tax table. It is suggested to find the Federal Income Tax sheet according to you marital status. If you are single you should look for the single’s sheet and if you are married, you should look for the couple’s sheet.
  • Find out your income and it should be within the range of 1095.85. For instance, if it is more than or equal to 1000 but less or equal to 1500 then it will be the range which you have to use. This range is arranged into two columns which are on the left side of the form.
  • Now you have to find out how many dependants you desire to claim. This is said to be withholding allowances. You have to find out your income range again and divide across the dependants and then you will find how much you have to deduct for Federal Income Tax.
  • For social security, there is a certain defined rate of payment which, if you go beyond your social security, will not be withheld. The amount for social security is around $100,000.00 per year. If you are already making $ 100,000 per year then you would already know how to calculate payroll or you would be having someone do this for you. It is to be noted that social security rate is always 6.2 % and the rate for Medicare is always 1.45%.
  • Now you have to take your income which was deducted for social securities. Which is

1095.85 * 6.2 % = $ 67.94

For Medicare, you have to calculate as

1.45 % * 1095.85 = $ 15.89

$ 15.89 should be deducted for Medicare.

  • Now you have to sum up all deductions. That is:

$ 67.94 + $ 15.89 + federal income tax = Total Deductions

  • Now, at the final step, you have to deduct your total deductions from your gross income to find out your Net Income amount or take home pay amount.

Tips and warnings

  • State Income Tax cannot be provided. You should obtain these rates from the Dept. of Revenue of your State or the webpage of the same.
  • All other deduction like insurance, charity or contributions etc. should be added in to the deductions to obtain exact Net Pay.
  • Pre taxed retirement should be subtracted from the gross income before taxes are deducted.

Payroll calculation is easy but it needs a lot of data and information and that also should be accurate. It is very important to know how to calculate payroll both for employer and employee. I hope this article would have helped you in the same.


Related Content:

  1. How to Calculate Withholding Tax
  2. How to Calculate Overtime Pay
  3. How to Calculate your Net Pay
  4. How to Calculate Net Earnings
  5. How to Calculate your Take Home Pay
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